Payment in Lieu of Notice (PILON)
PILON allows an employer to terminate employment immediately by paying the employee instead of requiring them to work their notice. A contractual PILON clause is taxed as earnings. Without a clause, PILON is a breach of contract but the first £30,000 may be tax-free as damages.
Last updated: February 2025
Subject to PAYE
PENP tax treatment
PENP rules apply
Non-contractual PILON
£30,000 (limited application)
Tax-free exemption
What the Law Says
Since April 2018, s.402D ITEPA 2003 introduced the post-employment notice pay (PENP) rules. All contractual PILON is taxed as earnings through PAYE. Non-contractual PILON is also subject to PENP rules, meaning a calculated amount representing basic pay during the notice period is taxed as earnings, with any excess potentially benefiting from the £30,000 exemption.
Your Obligations as an Employer
- Calculate PENP correctly when making a payment in lieu
- Operate PAYE on the PENP amount
- Include a PILON clause if you want the right to terminate immediately without breach
- Ensure PILON does not inadvertently release restrictive covenants
What to Include in Contracts
Include a clear PILON clause specifying the employer's right to make payment in lieu of all or part of the notice period, define what payments are included (base salary only or salary plus benefits), and confirm that exercise of PILON does not constitute a breach of contract.
View related contract templateCommon Mistakes
- Not calculating PENP correctly under the 2018 rules
- Assuming all PILON is tax-free (the £30,000 exemption has been significantly restricted)
- Making PILON without a contractual clause, potentially breaching the contract and releasing restrictive covenants
FAQ
Does a PILON without a contractual clause breach the contract?
Yes. Without a contractual PILON clause, terminating employment without notice is a breach of contract by the employer. This can be significant because the breach may release the employee from post-termination restrictive covenants, and the employee could claim damages for lost notice period benefits.
Can an employer pay PILON and enforce a non-compete?
If there is a contractual PILON clause, exercising it is not a breach and restrictive covenants should remain enforceable. Without a clause, the breach argument could undermine covenants. Best practice is to include both PILON and garden leave clauses, with restrictions linked to garden leave where possible.
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Get Started FreeThis is guidance for UK employers, not legal advice. For complex employment law matters, consult a qualified employment solicitor or ACAS.
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